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PHIL HARDWICK — Mortgage process illustrates solving pandemic economy not simple


It will be a sad and desperate time in a few months when millions of laid-off homeowners receive foreclosure notices. Add to that, the thousands of renters and commercial leaseholders who will face eviction.

Is this a problem that can be solved now? And who will solve it?

One idea is to simply call a timeout. Consider how a timeout works in a football game. When a timeout is called, play is suspended and both teams go to their respective sidelines, and the clock stops. The score does not change. The football stays in the same place. When play resumes everyone goes back to where they were when timeout was called.

Congress is taking a swipe at solving it. Timeout is the idea behind the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Except it’s called forbearance instead of timeout. Homeowners struggling to pay their mortgages because they’ve lost a job or income during the coronavirus pandemic can defer paying their mortgage for up to a year.

If only it was that simple.

It is not as easy as it sounds because a mortgage payment is more than just a borrower paying a lender a set sum of money. There are many sub-transactions along the way as the payment journeys to the lender and is peeled off little by little. Most mortgage payments are comprised of three major parts – principle and interest, real estate taxes, and homeowner insurance.  There may also be HOA dues and mortgage insurance premiums.

A personal example. Last year, my wife and I bought a new home. It was financed by the builder’s mortgage company. Shortly after closing, we received notice that our mortgage had been sold to another company and that we were now to make our monthly mortgage payment to someone else. Our new mortgage company is a servicer, meaning that the actual mortgage has been sold to someone else, perhaps a quasi-federal government agency such as  Federal National Mortgage Association, commonly known as Fannie Mae, Government National Mortgage Association, or Ginnie Mae, or some other provider of funds. Our mortgage is probably bundled with other mortgages and sold to other investors. Our payment is now “serviced” by this new company.

Our mortgage payment is comprised of three parts: principle and interest, real estate taxes and homeowner insurance premium. That payment creates a lot of jobs along the way. Someone at the mortgage servicer makes certain that the real estate taxes are paid, the homeowner insurance premium is paid, and that the principle and interest is forwarded to whomever now owns the mortgage. Someone at the county, the city and the school district is responsible for dispersing that money to the appropriate place. More jobs. In other words, a mortgage payment is not like a direct buyer-to-seller transaction, such as when a customer purchases a vegetable direct from the farmer who grew it. There are lots of other parties and transactions involved in the process. That’s why the timeout idea is not so simple. Many people and jobs are affected.

That monthly mortgage payment does not even count the people/jobs in the process of setting up that mortgage. Mississippi is what as known as a deed of trust state. The mortgage is actually two documents, the deed from the seller to buyer and another deed to a trustee whose role it is to sell the property if the buyer defaults on the mortgage payments. Some states incorporate both documents into one mortgage, and are thus known as mortgage states. Setting all this up, so to speak, is what happens at the real estate closing. Lots of money is accounted for and distributed to others involved in the transaction. Those may include real estate agents, appraisers, home inspectors, termite inspectors, insurance companies and others.

By the way, he word “mortgage” comes from the French “mort-gage.” “Mort” means death and “gage” meaning pledge. So when a borrower is paying off a home loan they are said to be “killing” it. States, lenders and others affected by the CARES Act are still trying to figure it out. It contains much more than just mortgage relief. And it doesn’t apply to every mortgage. There are many other provisions in the act, not to mention the rules and regulations that will be adopted as authorized by the act. And this is only one of several acts that Congress intends to pass.

The purpose of this discussion is simply to illustrate how complicated transactions in our economy have become and how many jobs are involved in just one transaction, i.e. buying a home. The same is true for commercial and residential leases.

The economic road ahead is a long one. There will be twists and turns and bridges and obstructions. We will all travel together on this journey. We will not be affected equally. It will be a difficult one because so many things in our economy are interconnected.

But we will make it.

» PHIL HARDWICK is a regular Mississippi Business Journal columnist. His email address is phil@philhardwick.com.


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